Why Philip Morris Isn't Making Its Marijuana Move -- Yet
January 23, 2019: Marijuana has vaulted into the investing limelight, and across the industry, investors are interested in finding ways to profit from the emergence of legalized cannabis products. Even mainstream companies are getting involved in the cannabis craze, with particularly strong interest from consumer products giants.
After seeing major players in the beverage industry take the lead, tobacco king Altria Group (NYSE: MO) made its own marijuana move in December with a significant investment in Canadian marijuana producer Cronos Group (NASDAQ: CRON).
Altria's action raised the obvious question of whether other tobacco companies would follow suit. But at least for now, the answer from former Altria international division and global cigarette giant Philip Morris International (NYSE: PM) is that the time isn't yet right for a major cannabis investment. That'll disappoint some marijuana investors, but it might be the best strategic move for Philip Morris right now.
What Philip Morris International's CEO had to say about marijuana
Philip Morris CEO Andre Calantzopoulos recently answered questions about his views on the potential for investing in cannabis-related companies. As he told the Financial Times (subscription required), there are several factors that have led the CEO to be more cautious on a major marijuana investment:
Regulators across different international markets haven't all taken the same approach toward regulating cannabis products, and that creates challenges from a logistical standpoint as well as creating risk of damaging Philip Morris International's reputation in some markets.
Calantzopoulos doesn't seem as comfortable with the science of cannabis, arguing that a better understanding of marijuana is needed in order to assess its potential.
Finally -- but perhaps most importantly -- Philip Morris remains determined to gain global acceptance for its IQOS heated-tobacco system, and it wants to concentrate on demonstrating the advantages of IQOS over traditional cigarettes rather than getting distracted by entering a brand-new market.
All of that makes sense from an immediate strategic standpoint, and it's consistent with what Calantzopoulos and Philip Morris have said in the past. In the long run, though, it's almost certain that Philip Morris will have to make a move toward embracing marijuana -- or risk getting left behind as the cannabis industry evolves.
Why Philip Morris will eventually stake its claim in cannabis
Even before Altria decided to invest in Cronos, it was clear that the synergies between tobacco and cannabis were substantial. As Fool contributor Sean Williams noted last September, falling demand for cigarettes along with substantial available free cash flow made it both important and possible for tobacco companies to make growth-oriented investments in the marijuana industry.
Moreover, the two sets of products fit well together. Smokable marijuana could eventually benefit from the same industry practices that Philip Morris and its peers have developed with smokable tobacco. And even as Philip Morris has made its IQOS platform the key driver of its growth plans, the potential of using heated or vaporized cannabis in lieu of the tobacco derivatives that current e-cigarettes have made popular is huge. Adapting IQOS to work with cannabis products is an interesting idea that could play a key role in the evolution of the marijuana market.
What investors want
Shareholders have also made their wishes known about what Philip Morris should do with the cannabis industry. Recent challenges in producing the levels of IQOS growth in the key Japanese market led some analysts following the stock to project weakness in the tobacco giant's overall results, and that in turn sent Philip Morris International's share price plunging in December.
There are also concerns that the relationship between Altria and Philip Morris might be starting to change. For a long time, the two companies have worked together and seemed to be following similar strategies. However, Altria's purchase of a large minority stake in e-cigarette leader JUUL Labs signaled that Altria doesn't want to commit itself entirely to IQOS as its sole alternative to traditional cigarettes. If that proves to be the case, Philip Morris will have to start making strategic moves of its own to use its global scope and take maximum advantage of worldwide growth opportunities. Cannabis is a logical direction to follow.
Don't give up on Philip Morris' marijuana prospects
For now, Philip Morris isn't ready to pursue cannabis-related investments. But if the right opportunity comes up, the tobacco giant is likely to move forward and embrace marijuana in the long run. Not doing so risks getting left behind, and that's something Philip Morris isn't willing to consider as a global leader in its industry.